Exam 6: The Meaning and Measurement of Risk and Return

Assume that you have $165,000 invested in a stock whose beta is 1.25,$85,000 invested in a stock whose beta is 2.35,and $235,000 invested in a stock whose beta is 1.11.What is the beta of your portfolio?

Cash flows is the most relevant variable to measure the returns on debt instruments,while GAAP net income is the most relevant variable to measure the returns on common stock.

Which of the following statements is MOST correct concerning diversification and risk?

The Beta of a T-bill is one.

You are going to invest all of your funds in one of three projects with the following distribution of possible returns: If you are a risk averse investor,which one should you choose?

In general,the required rate of return is a function of (1)the time value of money,(2)the risk of an asset,and (3)the investor's attitude toward risk.

The capital asset pricing model

Stock W has the following returns for various states of the economy: Stock W's standard deviation of returns is

You determine that LMN common stock has an expected return of 24%.LMN has a Beta of 1.5.The risk-free rate is 5%,and the market expected return is 15%.Which of the following is most likely to happen?

Investment A and Investment B both have the same expected return,but Investment A is more risky than Investment B.In the technical jargon of modern portfolio theory,Investment A is said to "dominate" Investment B.

Stock W has an expected return of 12% with a standard deviation of 8%.If returns are normally distributed,then approximately two-thirds of the time the return on stock W will be

You are thinking of adding one of two investments to an already well- diversified portfolio. If you are a risk-averse investor,which one is the better choice?

The expected rate of return from an investment is equal to the expected cash flows divided by the initial investment.

Which of the following measures the average relationship between a stock's returns and the market's returns?

Green Company stock has a beta of 2 and a required return of 23%,while Gold Company stock has a beta of 1.0 and a required return of 14%.The standard deviation of returns for Green Company is 10% more than the standard deviation for Gold Company.The expected return on the market portfolio according to the CAPM is

Discuss whether the standard deviation of a portfolio is,or is not,a weighted average of the standard deviations of the assets in the portfolio.Fully explain your answer.

Security A has an expected rate of return of 29.8 percent and a beta of 3.1.Security B has a beta of 1.70.If the Treasury bill rate is 5 percent,what is the expected rate of return for Security B?

You are considering an investment in Citizens Bank Corp.The firm has a beta of 1.6.Currently,U.S.Treasury bills are yielding 2.75% and the expected return for the S & P 500 is 14%.What rate of return should you expect for your investment in Citizens Bank?

A typical measure for the risk-free rate of return is the

You hold a portfolio with the following securities: What is the expected return for the portfolio?